Futures Traders
  1. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  2. Decision-Making Methods: Informed, Uninformed, Intuitive
  3. Informed Traders: Fundamental Traders, Technical Traders
  4. Swing Traders
  5. Buy and Hold Traders
  6. Value Traders
  7. Trend Traders
  8. KISS Traders
  9. Momentum Traders
  10. Range-bound Traders - Break-out Traders - Channel Traders
  11. Options Traders
  12. Options Seller Traders
  13. Day Traders
  14. Pattern Day Traders
  15. Intra-Day Traders
  16. Intra-Day Scalp Traders
  17. Introduction to Stock Trader Types
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

Futures Traders

Futures are financial contracts giving the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. Futures are also called futures contracts.

There are four main types of futures traders in the futures market, creating the liquid futures trading environment that we see today. No matter what a trader chooses to do in futures trading, they will inevitably fall into one or more of these types. The four types of futures traders are really classified based on the purpose of their trades rather than the actual trading strategy itself, as the same futures strategy can be applied for various purposes. They are:

  1. Hedgers: Hedgers do with futures contracts what futures contracts were initially designed to do when they were first developed along the rivers of Chicago, which is to hedge against price risk. A trader is a hedger when they go short on futures contracts while owning the underlying asset or other futures contracts of the same or related underlying in order to protect their existing positions against price fluctuations.
  2. Speculators: Speculators form the backbone of the futures trading market we see today. They provide liquidity and activity in the futures trading market through their day trading or swing trading strategies, buying and selling futures contracts outright in order to speculate on a strong directional move. This is also the most dangerous way of trading futures, as the price of the underlying asset could just as easily come around and put your position in a loss deep enough for a margin call.
  3. Arbitrageurs: Arbitrageurs are futures traders that are in the market in order to spot price anomalies between futures contracts and their underlying assets in order to reap a risk free return. Arbitrage is another huge source of volume and liquidity in the market as it typically takes an extremely big fund and big trading volume in order to return a worthwhile profit in arbitrage. Arbitrage is such a competitive area right now that super computers with powerful programs to spot such opportunities are set to perform such arbitrage automatically.
  4. Spreaders: Spreaders are futures traders that specialize in trading futures contracts in combination with other futures contracts or underlying assets in order to reduce risk and to extend profitability. Such complex futures positions are known as "Futures Spreads" or "Futures Strategies." This is a very professional and highly specialized field that has only recently been made known to the general public and makes use of the difference in price and rate of change in price of different offsetting futures contracts in order to create futures positions that move within certain limits and have a much higher chance of profit with a lot lower commissions.

Examples of futures at work

The assets often traded in futures contracts include commodities, stocks, and bonds. Grain, precious metals, electricity, oil, beef, orange juice and natural gas are traditional examples of commodities, but foreign currencies, emissions credits, bandwidth and certain financial instruments are also part of today's commodity markets. Two types of futures traders’ response to these assets are:

  • Hedgers do not usually seek a profit by trading commodities, but rather seek to stabilize the revenues or costs of their business operations. Their gains or losses are usually offset to some degree by a corresponding loss or gain in the market for the underlying physical commodity.
  • Speculators are usually not interested in taking possession of the underlying assets. They essentially place bets on the future prices of certain commodities. Thus, if they disagree with the consensus that wheat prices are going to fall, they might buy a futures contract. If their prediction is right and wheat prices increase, they could make money by selling the futures contract (which is now worth a lot more) before it expires (this prevents them from having to take delivery of the wheat as well). Speculators are often blamed for big price swings, but they also provide liquidity to the futures market.

Futures contracts are standardized, meaning that they specify the underlying commodity's quality, quantity, and delivery so that the prices mean the same thing to everyone in the market. For example, each kind of crude oil (light sweet crude, for example) must meet the same quality specifications so that light sweet crude from one producer is no different from another and the buyer of light sweet crude futures knows exactly what they are getting.

Conclusion

Futures trading is a zero-sum game; that is, if somebody makes a million dollars, somebody else loses a million dollars. Because futures contracts can be purchased on margin, meaning that the investor can buy a contract with a partial loan from his or her broker, futures traders have an incredible amount of leverage with which to trade thousands or millions of dollars’ worth of contracts with very little of their own money.

Forex Traders

  1. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  2. Decision-Making Methods: Informed, Uninformed, Intuitive
  3. Informed Traders: Fundamental Traders, Technical Traders
  4. Swing Traders
  5. Buy and Hold Traders
  6. Value Traders
  7. Trend Traders
  8. KISS Traders
  9. Momentum Traders
  10. Range-bound Traders - Break-out Traders - Channel Traders
  11. Options Traders
  12. Options Seller Traders
  13. Day Traders
  14. Pattern Day Traders
  15. Intra-Day Traders
  16. Intra-Day Scalp Traders
  17. Introduction to Stock Trader Types
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion
RELATED TERMS
  1. Value Investing

    The strategy of selecting stocks that trade for less than their ...
  2. Sector

    1. An area of the economy in which businesses share the same ...
  3. IRR Rule

    A measure for evaluating whether to proceed with a project or ...
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  5. Golden Cross

    A crossover involving a security's short-term moving average ...
  6. Warrant

    A derivative that confers the right, but not the obligation, ...
RELATED FAQS
  1. When does a growth stock turn into a value opportunity?

    A growth stock turns into a value opportunity when it trades at a reasonable multiple of the company's earnings per share ... Read Full Answer >>
  2. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  3. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  4. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  5. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  6. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
Hot Definitions
  1. Short Selling

    Short selling is the sale of a security that is not owned by the seller, or that the seller has borrowed. Short selling is ...
  2. Harry Potter Stock Index

    A collection of stocks from companies related to the "Harry Potter" series franchise. Created by StockPickr, this index seeks ...
  3. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions in a margin account. If an investor or trader holds ...
  4. Black Swan

    An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult ...
  5. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  6. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
Trading Center